Nolan Matthais: This Is What “ALWAYS” Happens Before a Market Crash

A market crash can erase years of gains in just a few months. Given the size of today’s financial markets, a crash will wipe out trillions of dollars of wealth.

However, before market crashes, there are usually some signals of an overheated market.

Understanding these signals can help avoid the worst of a crash. By avoiding losing too much during one of the market’s inevitable pullbacks, investors can be better prepared to profit from the rebound.

What do market crashes have in common? Most start when investors are overly optimistic. That can be measured by high amounts of leverage. That was true in the 1929 market crash, when many individual investors were able to buy on margin.

Today, traders can use tools such as options and futures to go beyond a margin cap in a typical brokerage account. And as of January 2025, right before the latest bear market kicked off, leverage was at a record high.

Another factor behind market crashes can come from trend following. In the months leading up to the 1987 crash, traders started using program trading. These programs would start to sell positions as they sold off. But when everyone rushed for the exit, disaster occurred. In this case, a one-day, 22% decline in the market.

Clearly, traders who deleverage when markets move higher and who get out before the trend shifts can avoid losses.

To see the full factors at play before a market crash, click here.